Thursday, September 24, 2009

CapitaLand - Caught in an ebbing tide

We have downgraded our rating for Capitaland to 3 from 2 after the government’s announcement (on 14 September) of measures to ensure a ‘stable and sustainable’ property market, including a surprise (in our view) withdrawal of the Interest Absorption Scheme (IAS). We expect CapitaLand’s shares, a proxy for the Singapore property sector, to be pulled down by the negative sentiment.

We see CapitaLand’s share-price driver as deal flow (capitalproductive announcements, including the possibility of monetising its China-mall assets or a major acquisition) and not the state of the Singapore residential market, although the company is poised to launch The Interlace next month. We have not changed our earnings forecasts.

We have lowered our six-month target price, to S$3.84, based on a reversion to its average premium to NAV (based on our estimates) of 29% over the past five years, from S$4.30 (based previously on one-half standard deviation above the average NAV premium). We have not changed our NAV estimate of S$2.98.

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Singapore Post: Time to factor in growth possibilities

Bumping up earnings estimates. We have tweaked our earnings estimates to take into account G3 Worldwide Aspac (G3AP)'s contribution to the group's revenue. We had earlier refrained from doing so given the uncertainty of its impact in the face of a fragile global economy. Although the general mood is still cautious given that government stimulus packages have not resulted in a sustained recovery in consumer spending (amongst other risks present in the global system), we now deem it appropriate to increase our earnings estimates by about 6% to incorporate G3AP's earnings. Overseas revenue now accounts for 8.2% of total revenue compared to only 0.4% previously.

Recovery underway but not time to party. Composite leading indicators of key OECD countries are continuing their upward trend after reaching their inflexion points around 1Q09. 2Q09 GDP growth cues have also been largely positive, especially for Asian economies. While there are still doubts on fundamental recovery in the financial markets, there is no denying that an improvement in investor sentiment has allowed companies and banks to raise capital and shore up their balance sheets. However, certain risks, such as 1) deteriorating personal credit and loans in the US, 2) possible build-up of asset bubbles in China, and 3) possible weak private sector spending in major economies after government stimulus plans wear off, threaten to destabilise the global economy and hence Singapore's economy. As SingPost's earnings are significantly correlated with Singapore's GDP growth, it is worth noting the possible trajectories of the global economy.

Worldwide postal sector only feeling a pinch. According to a Universal Postal Union survey, postal operators are definitely feeling the effects of the crisis, but are "not showing signs of an economic depression". Shares of listed postal operators have performed well during this crisis, given their relatively defensive nature (Exhibit 2). Besides having a decent dividend yield, SingPost is also pursuing growth, as seen by its recent M&A deals, enhancing the attractiveness of the stock.

Maintain BUY. SingPost is still the dominant player in Singapore's postalindustry despite threats from new competitors, and we foresee its strong operating and free cash flows to continue to buttress its reputation as a stable and well-run business. Meanwhile, it is taking the opportunity to grow its regional network during this downturn, which is definitely a positive development. With the incorporation of G3AP's future earnings, we have also raised our fair value estimate to S$1.09 (prev S$0.97). Maintain BUY.

Singapore Exchange - Downgrading to Neutral

Trading volumes have increased in recent weeks, and we believe these higher levels are sustainable due to an economic recovery and a decline in risk aversion among investors. We raise our FY10/11/12 EPS estimates for Singapore Exchange (SGX) from S$0.35/0.40/0.46 to S$0.39/0.43/0.48, and our price target from S$9.00 to S$9.20. However, we believe the stock is fully valued at current levels and thus downgrade our rating from Buy to Neutral.

We expect foreign inflows to Asia to continue because of its better economic growth prospects relative to the west. Additionally, we think local retail participation in Singapore’s equity market could rebound after having fallen from an average of 15.2% of household wealth in 2003-07 to an estimated 9.3% at the end of 2008. However, we believe this will be offset by fewer Chinese listings because of the better valuation premium commanded by similar listings in China.

We believe SGX’s main risk, the potential break-up of its monopoly, has been mitigated by its announcement of a joint venture with Chi-X to set up the first exchange-backed “dark pool” in Asia. We think this partnership should eliminate criticism of SGX’s monopoly status and allow it to defend its market share.

We continue to derive our price target using a DCF-based methodology, explicitly forecasting long-term valuation drivers with UBS’s VCAM tool. Our new price target reflects our higher estimates. Our key assumptions include a WACC of 8.9% (previously 8.6%) and a long-term growth rate of 3%. The change in WACC is due to higher beta.